d-3 marking scheme auditing

8/9/2019 D-3 Marking Scheme Auditing

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Marking Scheme for Advanced diploma year 111

Auditing and investigation- 6th Semester

No. Details Marks

a)Question no. one. Total marks =20 marksManagement Consultant is an examination of the health of a business by a specialist is called management consultancy.

Management consultancy relates only to specific problems and

provides solution only to those problems which are posed to it. Itand is problem oriented. is always adhoc while involving externalexperts. (4marks)

Full mark of 3will be issued if

student

demonstrate

h/his skill inmanagement

consultancy

idea

b) (4 marks)S/No. MANAGEMENT AUDIT MANAGEMENT CONSULTANCY

1 Institutional or individual

oriented

Problem oriented.

2 Overall review of all

managerial policies,

procedures and actions

Dealing with specific problems and

their solutions.

3 Periodical but regular Casual and adhoc4 Internal experts External experts.

One mark for

each point of

differentiation

between

management

consultancy

and

management

audit

c) Step one diagnosing the problem - From the data given bycustomer it is clear that gross profit is affected by costs of

production and not sales (as some time sales dropping are the

sources of problem but not in this case) a constant increase inmanufacturing costs in clear indication that management is not

efficient in production and acquisition of raw material and labor

cost.

Possible reasons for high costs:

1. It may be is inefficiency in finishing of bottles,

2. Raw materials including bottles are purchased at high costs

comparatively,3. There is an increase in production cost without

corresponding increase in selling prices.

What to do then?

1. Client should buy read made bottles and compare the price

with one that is finished within client factory,

2. Raw material should be purchased in big quantity to enjoy

bulk discount,3. Pay supplier on time to utilize cash discount,

4. JIT stock system if applicable could reduce storage costs.

5. Check possibility of increasing selling price but watch out

you competitors6. Timing of purchase to avoid adverse exchange rate that will

render production costs to rise7. Watch out companys overheads, uses of Generator should

avoided unless is necessary.

8. Think about changing more automated machines rather thanold version. (12 marks)

Here studentis test his/her

ability to

analyze thesituation and

providing

good solution

on the saidproblem.

Discussion

with examplewill earn mark

easily.

Answer is justan indicative;

student may

site other

relevant case.

1 Zanzibar Institute of Financial Administration -Chwaka


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a)Question no. two. Total marks =20

Money laundering, at its simplest, is the act of making money thatcomes from Source A look like it comes from Source B. In

practice, criminals are trying to disguise the origins of money

obtained through illegal activities so it looks like it was obtainedfrom legal sources. Otherwise, they can't use the money because it

would connect them to the criminal activity, and law-enforcement

officials would seize it. It is the process of making dirty money toappear good one.

The most common types of criminals who need to launder money

are drug traffickers, embezzlers, corrupt politicians and public

officials, mobsters, terrorists and con artists

( 5 marks)

Student isexpected to

demonstrate

that, h/she hasa Knowledge

on moneylaundering

b) Stages/process of money laundering

i. Placement - At this stage, the launderer inserts the dirtymoney into a legitimate financial institution. This is often inthe form of cash bank deposits. This is the riskiest stage of

the laundering process because large amounts of cash are

pretty conspicuous, and banks are required to report high-value transactions.

ii. Layering - Layering involves sending the money through

various financial transactions to change its form and make itdifficult to follow. Layering may consist of several bank-to-

bank transfers, wire transfers between different accounts in

different names in different countries, making deposits and

withdrawals to continually vary the amount of money in theaccounts, changing the money's currency, and purchasing

high-value items (boats, houses, cars, diamond) to change

the form of the money. This is the most complex step in anylaundering scheme, and it's all about making the original

dirty money as hard to trace as possible.

iii. Integration - At the integration stage, the money re-entersthe mainstream economy in legitimate-looking form -- it

appears to come from a legal transaction. This may involve

a final bank transfer into the account of a local business in

which the launderer is "investing" in exchange for a cut of

the profits, the sale of a yacht bought during the layeringstage. At this point, the criminal can use the money without

getting caught. It's very difficult to catch a launderer duringthe integration stage if there is no documentation during the

previous stages.

Full marks for

discussion ofthese three process of

money

laundering

c) Symptoms of money laundering Full mark for



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1. Secretive client: the client who is reluctant to providedetails of his identity and back ground.

2. Untypical instruction: the client who has obvious

reasons for using particular company.3. Lack of economic purposes; the clients transaction

lacks or includes steps which lack any obviouseconomic purposes.

4. Nominees and trusts behind the fund management,transfer, deposition etc

5. Holding client asset without convincing reasons

6. Suspect terrorist i.e country where drug production ortrafficking may be prevalent

(5marks)

any five fourpoints each at

1.25 mark

d) Effects of money laundering.1. Social effects

2. Economic effects

3. Taxation effects4. Security effects

(5marks)

Student is

expected to

discuss these

effects veryshortly

a) i

ii

Question no. three, total marks=20Economy may be defined as minimizing the cost of resources used

for an activity having regard to the appropriate quality. Economyrelates to all types of resources such as physical, financial, human

and information. The question of economy is relevant to the

acquisition of resources. Auditors try to determine whether theresources have been acquired in the right amount, at the right place,

and the right time, of right kind and at the right cost.

This by itself is not very easy. It presumes that there are standardsavailable to judge whether considerations of economy were kept inview in acquiring resources. One example of a standard for

economy is to accept the lowest open bid for buying an asset.

(6marks) Indicator of Economy:

1. Decisions are made with cost consciousness.

2. Poor quality output due to low quality input.3. Suspension/delay in implementation of decisions due to rise

in market process.

4. Nonpayment/Settlement of certain obligations e.g. staff

overtime without justifiable reasons.5. Existence of savings not matching with the level of

performance.

6. General, management becomes too conservative in makingdecisions due to financial implications of those decisions.

(4 marks)



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b) Usefulness of the concept in public sector audit.

1. The public sector in Tanzania is generally malfunctioning

due to mismanagement, misuse, and underutilization ofresources both financial, non-financial and human

resources.2. The government budget is characterized of persistent

deficits due to excessive expenditures of the votes and

institutional budgets

3. Public officers are overstaffed due to uncontrolledrecruitment.

4. Fraud and embezzlement are rampant in the public sector

coffers due to lack of accountability

5. Public buildings and other tools eg. Vehicles are dilapidates

and become excessively obsolete due to lack of

maintenance, care, and misuse.

6. Government stores are heavily misused or stolen due to lack

of effective controls.

7. Some individuals are becoming millionaires in the public

system due to rampant irregularities in the use of public

moneys and other resources and also due to irregularschemes of awarding tenders and opportunities.

8. Abuse of power, misuse of authority, override of regulatory

schemes and disregard of the law

Just pointsmentioning.

2 marks for

every pointmentioned

a) Question no. four1. Self-interest;2. Self-review;

3. Advocacy;

4. Familiarity; and5. Intimidation. .

1. Examples of circumstances that may create self-interest

threats include, but are not limited to:

A financial interest in a client or jointly holding a financial

interest with a client.

Undue dependence on total fees from a client. Having a close business relationship with a client.

Concern about the possibility of losing a client.

Potential employment with a client.

Contingent fees relating to an assurance engagement.

A loan to or from an assurance client or any of its directorsor officers.

Two marksfor each point.One for

mentioning

and other forgiving

examples



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2. Examples of circumstances that may create self-review


The discovery of a significant error during a re-evaluation

of the work of the auditor.

Reporting on the operation of financial systems after being

involved in their design or implementation.

Having prepared the original data used to generate recordsthat are the subject matter of the engagement.

A member of the assurance team being, or having recently

been, a director or officer of that client.

Performing a service for a client that directly affects the

subject matter of the assurance engagement.

3. Examples of circumstances that may create advocacy


Promoting shares in a listed entity when that entity is a

financial statement audit client.

Acting as an advocate on behalf of an assurance client inlitigation or disputes with third parties.

4. Examples of circumstances that may create familiarity


A member of the engagement team having a close or

immediate family relationship with a director or officer of

the client.

A member of the engagement team having a close or

immediate family relationship with an employee of the

client who is in a position to exert direct and significant

influence over the subject matter of the engagement. A former partner of the firm being a director or officer of

the client or an employee in a position to exert direct and

significant influence over the subject matter of theengagement.

Long association of senior personnel with the assurance

client.5. Examples of circumstances that may create intimidation


Being threatened with dismissal or replacement in relationto a client engagement.

Being threatened with litigation. Being pressured to reduce inappropriately the extent of

work performed in order to reduce fees.

(10

marks)



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b Gifts and Hospitality

1. A professional auditor, or an immediate or close family

member, may be offered gifts and hospitality from a client.Such an offer ordinarily gives rise to threats to compliance

with the fundamental principles. For example, self-interestthreats to objectivity may be created if a gift from a client is

accepted; intimidation threats to objectivity may result fromthe possibility of such offers being made public.

2. The significance of such threats will depend on the nature,

value and intent behind the offer. Where gifts or hospitalitywhich a reasonable and informed third party, having

knowledge of all relevant information, would consider

clearly insignificant are made a auditor may conclude thatthe offer is made in the normal course of business without

the specific intent to influence decision making or to obtain

information. In such cases, the auditor may generallyconclude that there is no significant threat to compliancewith the fundamental principles.

3. If evaluated threats are other than clearly insignificant,

safeguards should be considered and applied as necessary toeliminate them or reduce them to an acceptable level. When

the threats cannot be eliminated or reduced to an acceptable

level through the application of safeguards, a auditor shouldnot accept such an offer

A auditor should not engage in any business, occupation or activity

that impairs or might impair integrity, objectivity or the good

reputation of the profession and as a result would be incompatiblewith the rendering of professional services. (10 marks)

Full marks fordiscussion of

the matter

a)Question no. five. An enquiry into the state of affairs of a business for a

special purpose.

It is a searching examination of the accounts and records ofa business to know its actual earning capacity and its real

financial position

Investigation involves enquiry into facts behind the books

and accounts, into the technical financial and economic

position of the business or organization

( 4 marks)

Studentshould

provide clear

definition ofinvestigation

in order to

earn fullmarks

b) Investigations may be broadly divided into three classes:1. Investment or finance Investigation on behalf of:

i. A prospective investorwho consider

purchasing,

becoming a partner,

Two marksfor every

point. One for

listing andother for



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ii. flotation of a company to take over a business

A company which is purchasing a business

A creditorwho is asked to give or extend existing credit, or

to lend money to the business2. Mismanagement

This investigation may be undertaken on behalf of a:

Committee of creditors, where insolvency is suspected;

Committee of members, where mismanagement is alleged;

Trustee or beneficiary under the relevant statute.

3. Fraud and Corruption

This investigation may be undertaken on behalf of the:

Proprietors, to detect or to ascertain the extent of

defalcations;

Revenue and Tax authorities, where evasion of tax is

suspected; Bribery, and other similar crimes committed by people

holding positions of trust

(10 marks)

explaining

c) 1. Real Earinging Capacity

Actual profit may be different from what shown in P/L,Redrafted P/L in tabulated form, Making adjustments to

prepared P/L., Be in position to make comparisons to

previous years, Will the business continue to earn sameprofit after acquired?

Deductions from net profit

Capital profit or exceptional in nature, Income from assets

not taken over by the purchaser, Rent if the building is nottaken over by purchaser, Reasonable sums of managerial

remuneration if not added before, Capital profit or non-

recurring in its nature, Income from assets not taken over by

the buyer, Rent if building is not taken, Reasonable sums ofmanagerial remuneration, Any additional expenditure that

purchaser going to incur after purchase,

Additions to profits:

Capital losses or loss of exceptional nature, Any capitalexpenditure charged to the revenue, Interest on borrowing

when buyer does not need it, Rent is the buyer going to buy

the building as well, Any excessive provision for bad debtand other, Any excessive cash discounts, Charges not

incidental to business, Investigator will pay attention on:

Student is

expected to

mention thesethree points

and by

explaining,

he/she should

earn 9 marksone marks is

for givingexamples

suitable for

this case.



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Gross profit to sale ratio, stock to sale ratio, Trade expensesto sale ratio, Check any variations in those period covered

under investigation, Falsification to accounts

2. Intrinsic worth of the business

Financial stability of the business, Check proper valuation on assets

and liabilities if they are going concern (not over or undervaluation), Goodwill valuation, Adequacy of provision for depr.

Bad and doubtful debt. Adequacy of capital employed in business,

WC vs. their requirements and availability, Loan capital to fixedassets of the business, Assets not to be taken ( asset not to

taken/t/assets), Check obsolete asset, Arrange B/S for required

period in tabulate form, Compare movement of various assetsduring the period, Check debtor to sales ratio and trends (speedwhereby account are collected), Check creditor to purchases ratio

and trends (trends of business toward prompt payments), Capitalfixed up in assets, Carrying out a detailed vouching of the capital

items to determined that assets with revenue nature have been

capitalized

3. Future prospects of the businessInquire into number of and nature of the customers, Dependence of

existing owner to the business, customers and suppliers willingnessto support new bus, Possibility of competition, Does old owner

continue with same business in direct magnitude with new

business, What is the market goodwill of the business, Skilled andsemi-skilled workers, Lease right, time to finish contract, Contract

with the employees, redundancy costs, years of the services

remained, If is limited company: authorized, issued shares capital,Calls in arrears, uncalled liability, Dividend paid and in arrears,

Creditors-security issued for loan

( 10 marks)

End of the paper


d-3 marking scheme auditing

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